Published August 1, 2002 | August 2002 issue
Efforts to develop alternative-financing products in the Twin Cities involve a diverse group of individuals from the banking, housing and community development fields. Community Dividend spoke with two such individuals to learn more about Islamic-financing issues.
Wafiq Fannoun has devoted over 15 years to developing financial products for interest-averse communities. He works as a business development specialist at Northside Residents Redevelopment Council in Minneapolis, serves on the board of directors of the Neighborhood Development Center (NDC) and is president of Reba Free, LLC, an Islamic financial-consulting service. Fannoun is also a member of the Islamic finance work group organized by the Federal Reserve Bank of Minneapolis.
Hussein Samatar is a small business banking officer at Wells Fargo in Minneapolis. An active community member, he has served on the board of directors of the NDC, provides technical assistance to the loan committee of the Minneapolis Consortium of Community Developers, and volunteers at a local community radio station.
Community Dividend: Our cover story explores issues related to Islamic financing. What are some common misconceptions that non-Muslims have when it comes to Islamic beliefs about financing?
Hussein Samatar: The biggest misconception is over the issue of interest. People don't understand that there are alternative systems for financing things—like houses or cars—that don't deal with interest.
Wafiq Fannoun: That's the main thing. Because everything else is founded on interest, a lot of people are surprised to learn that there's something absolutely different. When they hear that there are alternatives, they say, "How can that be?"
There are some financial institutions that are trying to deal with this issue by just changing the word "interest" to "fees" or something else. But in reality, it's interest and that doesn't go along with Muslim belief. It's not just a matter of changing the names—it's a matter of concepts.
CD: Would you briefly explain some of the concepts for us?
WF: Sure. There are two basic concepts underlying the whole Islamic financial system. One is basic trade, meaning buying and selling and making a profit. And the other concept is investing, in which people carry the risk together and take part in profit and loss. Everything has to be based on these concepts. From them, you can work any deal with any given partners or institutions, at any time and place.
Also, there is an obligation in Islam for an individual person to pay off his or her debt. And it works both ways. If a person goes through financial hardship, the lender needs to be lenient and not stick the person with big penalties and fees and so on. Islam puts the responsibility on both parties.
CD: Are most Muslims in the Twin Cities knowledgeable about U.S. banking and financial services?
HS: It depends, because some of them have been here longer, and some of them have just arrived in the last couple of years. If they grew up in the United States or have lived here for some time, then definitely. They've been dealing with banks, they've been dealing with financial institutions, they understand money and know how it works. But if they're new immigrants, some of them might not have dealt with banks.
WF: Yes, a new immigrant—for example, someone from Ethiopia or Somalia, where the financial system might be based almost entirely on cash—probably did not have a checking or savings account and never had to deal with banks in his or her life. It's similar to the situation in this country about 50 years ago, when not everybody had a bank account.
Also, I have to say that the majority of banks overseas in Muslim countries, probably about 80 percent of them, function the same way as the traditional banking system we have here. Islamic banking became popular in the 1970s and 1980s, when people became more aware of the concept of interest and alternatives to dealing with it. Before that time, all banks were based on the system in the West. Those who dealt with that system know it very well.
CD: Hussein, as a small business banker in Minneapolis, you often deal with customers who are Muslim. How concerned are they about financing their businesses in ways that follow Islamic law?
HS: It really depends on the person. I see a lot of people who are running businesses, who deal with money all the time, coming to the bank and getting conventional loans. They understand the challenges and frustrations of running a business, and they face certain realities and deal with them. They follow the proverb, "When in Rome, do as the Romans do," and they just use the system.
But some other business owners are concerned about borrowing from the bank because of the interest, so they have a hard time finding working capital. To give a specific example, grocery store owners might have a gap between the cash they collect and the checks they pay. Sometimes, because they don't like to apply for a line of credit and might not have enough cash on hand, their account will be overdrawn and they'll be charged fees. So then I tell them that I understand their beliefs and convictions, and I understand how they want to run their businesses, but they must have an alternative way of financing their needs.
CD: How knowledgeable do you think other bankers are about Islamic-financing issues?
HS: I think that, as a profession, we are much more aware than we were before. No question about it. Two years ago, I would have told you that not many bankers were aware of it. But now we're really learning and understanding and trying to come up with some ideas for alternative financing.
CD: What types of financial services are most needed by Muslims in the Twin Cities?
WF: There's a need for mortgage and business loans, and a dire need for more alternative savings accounts. Savings accounts are a big issue for a lot of people in the Muslim community right now, because they either have to set up the account and not accept the interest or take the interest and then give it to the needy. A number of banks offer free checking accounts, and Muslims can use those accounts without worrying about incurring interest, so there isn't such a need for alternative types of checking.
HS: I think, also, many people in the Muslim community really need the knowledge to take advantage of the resources that are available. Many of them just came to the country and would like to buy houses and start business endeavors, but taking advantage of the resources can be challenging. For example, they need to know that they can visit the Business Information Center in downtown Minneapolis to learn how to write a business plan. They need to identify the community development corporations (CDCs) in their neighborhoods and go there to ask for help, but that doesn't usually happen. So, usually, they come to the bank, and the value I add as a banker is to understand what all the CDCs do, so I can give my customers that information. The more information they have, the better decisions they can make.
I also see that many new immigrants need to have the three pillars of running a business in place—that is, to have a good lawyer, a good accountant and a good banking relationship. We tell them that these things are essential, especially when they sign leases or pay their income and payroll taxes.
CD: What products can lenders provide to meet the needs of the Twin Cities Muslim community?
WF: Creating alternative savings accounts is a big issue, and another big issue is mortgage products. A lot of Muslims I know personally would love to buy a house but because of this issue they wait or try to find other alternatives.
There are a lot of financial institutions that would love to work with the Muslim community because, with the growth of the community in the last five to seven years, it's a big market. And if you can tap into a new market and benefit from it, why not? But the regulations limit financial institutions from getting into the market. That's where we hope the Federal Reserve and other big institutions can help relax some of the laws, to allow financial institutions to respond to this need in the community.
HS: I think it really depends on the leadership of any bank to understand and find ways to tap into this market. At Wells Fargo, our community development group has really been in the forefront, trying to understand the issue. I think it will only be a matter of time before we come up with a product that can serve these communities.
For now, when we deal with Muslim customers, we can give appropriate advice and say, "Hey, this is how you can really run your business," in terms of the loans they are looking for. And we must have a list of community organizations on our table, to know what they're doing and try to hook our customers up with them. And I really try to steer people to the NDC because that's the only organization I know of that has an immediate product available. I think the NDC is doing a good job, and Wafiq has been a great resource.
CD: Can you tell us a little more about the NDC program?
WF: The program is alternative small business financing for people who are averse to interest. It's based on Islamic principles, but is open to everybody—Muslims, Christians, Jews or whomever. It's based on the two concepts I mentioned earlier. From those concepts, we have about eight or nine financial mechanisms we can utilize. One of these mechanisms is murabaha, which means "profit-based," or making a profit based on buying and selling. For example, we worked with a trucking company and we purchased vehicles, sold them to the company and added our profit. We figured in the condition that they can pay us back in a certain amount of time, and we considered that when we added in the amount for our profit. We give them one price and are done with it.
The other thing we do is a kind of limited partnership, or what we call royalty investment. If business owners want to expand and produce a new product, we partner with them on that product, in profit and loss. If they've made a profit at the end of the term, we get the principal plus our profit. If there's a loss, we take the principal less our portion of the loss.
We established the program a little over a year ago, and we've done about 10 or 12 deals so far. It's really successful, and we've had a couple of organizations coming forward to help fund it, including the City of Minneapolis Empowerment Zone and the Urban Initiative Fund of the State of Minnesota Department of Trade and Economic Development.
CD: Wafiq, you're a member of the Islamic finance work group convened by the Minneapolis Fed. What are some of the group's successes, and what issues still need to be addressed?
WF: Putting the issue in the forefront is a big accomplishment. Recognizing that this is an issue and that this community has a need—that is a success. And trying to work with a couple of institutions now to develop a product. If it comes to the market, that would be a big, big success, because it would solve some of the problems with mortgages, for example. Just meeting and having different financial institutions represented, led by the Fed, is a success by itself.
And the remaining issue is to find the solution. To find actual products that can satisfy the need of financial institutions to make a profit and the need for the Muslim community to adhere to Islamic law. That's the challenge that's still in front of us.